Ethical Issues in Finance BAF 332 - Bülent Şenver · Core Values of Companies •Accenture 1. Stewardship 2. The Best People 3. Client Value Creation 4. One Global Network 5. Respect

Ethical Issues in Finance BAF 332

Bülent Şenver

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BAF 332 Course Content

• 1. Finance Ethics: An Overview• 2. Fundamentals of Finance Ethics• 3. Ethics and the Retail Customer• 4. Ethics in Investment• 5. Ethics in Financial Markets• 6. Ethics in Financial Management

Ethics in Finance [email protected] 2

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Function of Financial Markets

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Comercial Banking

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DEPOSITSLOANS

GetGive

Interest Income

GetInterest Expense

GiveEthics in Finance

Comercial Banking

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DEPOSITSLOANSIBLIEA

Interest Income Interest ExpenseEthics in Finance

Interest Earning Assets Interest Bearing Liabilities

Net InterestIncome

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+ InterestIncome

- InterestExpense

NetInterestIncome

NetNon IntersetIncome

+ Non InterestIncome

- Non InterestExpense

Revenue Sourses of Commecial

6

Revenue 1 Revenue 2

Expense 1 Expense 2

Ethics in Finance

Net Income Before Tax

Bank Intermediation Services

• Intermediation:• 1. Denomination• 2. Currency• 3. Maturity• 4. Interest Rate• 5. Interest Sensitivity• 6. Security Collateral

• Related Risks:• 1. Concentration R• 2. Foreign Exchange Position • 3. Liquidity R• 4.Net Interest Income R• 5. Sensitivity Gap R• 6. Recoverability

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Needs of Bank CustomersNeeds: Products:

• 1. Savings need• 2. Borrowing need• 3. Investment need• 4. Security need• 5. Trading need• 6. Payment need• 7. Advice & consulting

need

• 1. Term Deposits• 2. Loans• 3. Securities, Government Bonds, Treasury

Bills, Mutual Funds, Certificate of Deposits, Mortgage Backed Securities, Asset Backed Securities

• 4. Insurance products, Derivatives, Forwards, Swaps, Options, Hedging

• 5. Buy & sell Foreign Currencies & Capital Market Products

• 6. Cash, Cheques, Promissory Notes, Credit Cards, Debit Cards, ATM, POS, EFT, SWIFT

• 7. Asset management, Wealth Management, Investment Banking

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Financial IntermediariesTypes of Banks• Commercial Banks• Investment Banks• Merchant Banks• Islamic Banks (participation banks)• Development Banks• Off Shore Banks• Special Purpose Banks

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Financial IntermediariesNon Bank Financial Institutions

• Factoring• Forfeiting• Leasing• Insurance• Pension Funds• Brokerage Houses• Consumer Finance • Venture Capital Funds

• Angel Capital• Investment Funds• Mutual Funds• Mortgage Funds• Foreign exchange offices• Money transfer

companies• Real Estate Property

Funds

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Overview of Ethics in Finance• Finance concerns Other People’s Money (OPM)• Other People’s Money (OPM) invites misconduct• Billions of financial transactions take place every day with a higih level

of integrity• Placing our assets in the hands of other people requires immense

trust• Trust is essential in finance• Finance is impossible without Ethics


Overview of Ethics in Finance• Ethical misconduct is not always a matter of bad people

doing bad things,

• But often of good people who stumle unwittingly into wrongdoing


Ethical Compass

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WrongIncorrect

RightCorrect

GoodFairJust

BadUnfairUnjust

13Ethics in Finance

Whose Compass?

The Bank’s The Customer’s

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RIGHT

WRONG

FAIR UNFAIR

RIGHT

WRONG

UNFAIR FAIR

14Ethics in Finance

How to build «Ethics Discipline» in a Company• 1. Determine your VISION statement• 2. Determine your MISSION statement• 3. Determine your VALUES• 4. Determine your ETHICS PRINCIPLES• 5. Assign one Board of Directors Member as «ETHICS B of D MEMBER»• 6. Assign one manager as «ETHICS OFFICER»• 7. Establish an «ETHICS COMMITTEE»• 8. Write your «ETHICS CODE»• 9. Organize «ETHICS TRAINING» to your personnel• 10. Conduct «ETHICS AUDIT» internal audit & external audit• 11. Review & evaluate the «ETHICS COMPLIANCE REPORT» & take

necessary actions


Finance Ethics An Overview

Causes of Wrongdoing• A. Pressure and culture• Strong organizational pressures to do things which are unethical or

illegal (just do it!)• Unethical behavaiour can also be fostered by the cultute of an

organization. (not a conscious act, more a reflex)• B. Organisational factors• Wrongdoing also occurs in large organisations when responsibility is

diffused among many individuals and no one person is «really» responsible.

• Wrongdoing can be atrributed only to the organization as a whole.



Causes of Wrongdoing• C. Innovation• Innovation creates new situations in which the rules for proper conduct, as

well as for safe practice, are uncertain and slow to develop.• New situations sometimes involve a change of incentives and a shift of

risk and responsibility.(mortgage loans from originate-to-hold model tooriginate-to-sell model)

• Innovation is inherently complex and opaque and the dangers are difficultto percive.

• Innovation is subject to a classic collective action problem in which no oneindividual can affect an outcome that can be avoided only if everyonecooperates. (As long as the music is playing, you’ve got to get up anddance)



Excuses for Unethical Behaviour (Wrongdoing)• 1. Everybody else is doing it• 2. It’s not that big of a deal• 3. It’s necessary (the end justifies the means)• 4. It’s not going to hurt anyone• 5. It’s for the benefit of the company• 6. I deserve it• 7. It’s legal• 8. Nobody will see, Nobody will know • 9. There is no penalty for wrongdoing• 10. I was forced to do it• 11. I did it only once


Core Values of Companies

• Accenture1. Stewardship2. The Best People3. Client Value Creation4. One Global Network5. Respect for the Individual6. Integrity

• Adidas7. Performance: Sport is the foundation for all we do and executional excellence is a core value of our Group.8. Passion: Passion is at the heart of our company. We are continuously moving forward, innovating, and improving.9. Integrity: We are honest, open, ethical, and fair. People trust us to adhere to our word.10. Diversity: We know it takes people with different ideas, strengths, interests, and cultural backgrounds to make our company succeed. We encourage healthy debate and differences of opinion.



• Adobe11. Genuine.12. Exceptional.13. Innovative.14. Involved.

• American Express15. Customer Commitment16. Quality17. Integrity18. Teamwork19. Respect for People20. Good Citizenship21. A Will to Win22. Personal Accountability


Core Values of Companies• Barnes & Noble Booksellers

23. Customer Service24. Quality25. Empathy26. Respect27. Integrity28. Responsibility29. Teamwork

• Ben and Jerry’s Ice-Cream30. We strive to minimize our negative impact on the environment.31. We strive to show a deep respect for human beings inside and outside our company and for the communities in which they live.32. We seek and support nonviolent ways to achieve peace and justice. We believe government resources are more productively used in meeting human needs than in building and maintaining weapons systems.33. We strive to create economic opportunities for those who have been denied them and to advance new models of economic justice that are sustainable and replicable.34. We support sustainable and safe methods of food production that reduce environmental degradation, maintain the productivity of the land over time, and support the economic viability of family farms and rural communities.

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• Bulid-A-Bear35. Reach36. Learn37. Di-bear-sity38. Colla-bear-ate39. Give40. Cele-bear-ate

• Coca-Cola41. Leadership: The courage to shape a better future42. Collaboration: Leverage collective genius43. Integrity: Be real44. Accountability: If it is to be, it’s up to me45. Passion: Committed in heart and mind46. Diversity: As inclusive as our brands47. Quality: What we do, we do well



• Facebook48. Focus on impact49. Move fast50. Be bold51. Be open52. Build social value

• Four Seasons Hotels & Resorts53. Supporting Sustainability54. Building Communities55. Advancing Cancer Research



• Genentech56. Passion means we use our drive and commitment to energize, engage and inspire others.57. Courage means we are entrepreneurial and thus take risks, reach beyond boundaries and experiment.58. Integrity means we are consistently open, honest, ethical and genuine.

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• Google59. Focus on the user and all else will follow.60. It’s best to do one thing really, really well.61. Fast is better than slow.62. Democracy on the web works.63. You don’t need to be at your desk to need an answer.64. You can make money without doing evil.65. There’s always more information out there.66. The need for information crosses all borders.67. You can be serious without a suit.68. Great just isn’t good enough.



• H&M69. We believe in people70. We are one team71. Straightforward and open-minded72. Keep it simple73. Entrepreneurial spirit74. Constant improvement75. Cost-consciousness

• The Honest Company76. Create a Culture of Honesty77. Make Beauty78. Outperform79. Service Matters80. Sustain Life81. Be Accessible82. Pay it Forward83. Fun!



• IKEA84. Humbleness and willpower.85. Leadership by example.86. Daring to be different.87. Togetherness and enthusiasm.88. Cost-consciousness.89. Constant desire for renewal.90. Accept and delegate responsibility.

• Kellogg’s91. Integrity92. Accountability93. Passion94. Humility95. Simplicity96. A focus on success



• Nike97. It is our nature to innovate.98. Nike is a company.99. Nike is a brand.100. Simplify and go.101. The consumer decides.102. Be a sponge.103. Evolve immediately.104. Do the right thing.105. Master the fundamentals.106. We are on the offense – always.107. Remember the man. (The late Bill Bowerman, Nike co-founder)”

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• Procter & Gamble108. Integrity109. Leadership110. Ownership111. Passion for Winning112. Trust


Core Values of Companies• Rackspace

113. Fanatical Support in all we do.114. Results first, substance over flash.115. Committed to Greatness116. Full Disclosure and Transparency117. Passion for our Work118. Treat fellow Rackers like Friends and Family

• Southwest Airlines119. Work Hard120. Desire to be the best121. Be courageous122. Display urgency123. Persevere124. Innovate125. Follow The Golden Rule126. Adhere to the Principles127. Treat others with respect128. Put others first129. Be egalitarian130. Demonstrate proactive Customer Service131. Embrace the SWA Family132. Have FUN133. Don’t take yourself too seriously134. Maintain perspective135. Celebrate successes136. Enjoy your work137. Be a passionate Teamplayer138. Safety and Reliability139. Friendly Customer Service140. Low Cost

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• SquareSpace141. Be your own customer142. Empower individuals143. Design is not a luxury144. Good work takes time145. Optimize towards ideals146. Simplify

• Starbucks Coffee147. Creating a culture of warmth and belonging, where everyone is welcome.148. Acting with courage, challenging the status quo and finding new ways to grow our company and each other.149. Being present, connecting with transparency, dignity and respect.150. Delivering our very best in all we do, holding ourselves accountable for results.



• Teach for America151. Transformational Change152. Leadership153. Team154. Diversity155. Respect and Humility

• Twitter156. Grow our business in a way that makes us proud.157. Recognize that passion and personality matter.158. Communicate fearlessly to build trust.159. Defend and respect the user’s voice.160. Reach every person on the planet.161. Innovate through experimentation.162. Seek diverse perspectives.163. Be rigorous. Get it right.164. Simplify.165. Ship it.



• Virgin Airlines166. We think customer167. We lead the way168. We do the right thing169. We are determined to deliver170. Together we make the difference

• Warby Parker171. Treat customers the way we’d like to be treated.172. Create an environment where employees can think big, have fun, and do good.173. Get out there.174. Green is good.



• Yahoo!175. Excellence176. Innovation177. Customer Fixation178. Teamwork179. Community180. Fun

• Zappos181. Deliver WOW Through Service182. Embrace and Drive Change183. Create Fun and A Little Weirdness184. Be Adventurous, Creative, and Open-Minded185. Pursue Growth and Learning186. Build Open and Honest Relationships With Communication187. Build a Positive Team and Family Spirit188. Do More With Less189. Be Passionate and Determined190. Be Humble


Values most commonly listed by 50 banks

• 1. Integrity – 34 banks• 2. Teamwork – 15 banks• 3. Excellence – 11 banks• 4. Commitment – 10 banks• 5. Honesty – 10 banks• 6. Respect – 10 banks• 7. Service – 10 banks

• 8. Professionalism – 8 banks• 9. Customers – 7 banks• 10. Trust – 6 banks• 11. Community – 6 banks• 12. Loyalty – 6 banks• 13. Innovation – 5 banks• 14. Responsibility - 5• 15. Do the Right Thing - 4






Ethics and Law

Ethical Unethical

Legal Case 1 * Case 2

illegal * Case 3 Case 4



Ethics and Law• The law is a rather crude instrument that is not suited for regulating all

aspects of financial activities.• A moral rule «Be fair!» or a standard of suitability may be more effective

than a precise legal rule of the form «Do such-and-such».• Pricese rules can often be «gamed» to produce unfair results. (tax shelter)• The law often develops as a reaction to activities that are considered to be

unethical.• Obeying the law is insufficient for managing an organization or for

conducting business because customers, employees and other stakeholders demand ethical treatment.



Financial Markets• The first obligation or duty in any market exchange is to abide by the

agreements made. (keep your promise)• Failures to abide by agreements or contracts in market exchanges results in

nonperformace or breach of contract. (default)• The parties can also take advantage of any ambiguity or omission in an

agreement or contract to advance their own interests.• All market exchanges are governed by a general prohibition against force

and fraud.• Many of the rules and expectations for markets are concerned with

fairness.• Market exchange between two parties often have third party effects. They

affect others who are not parties to a transaction.


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Classifications of Financial Markets

1. Debt Markets• Short-Term (maturity < 1 year) Money Market• Long-Term (maturity > 1 year) Capital Market

2. Equity Markets• Common Stock• Bonds• Stock Exchange Market


Characteristics of Debt Markets Instruments

• Debt instruments • Buyers of debt instruments are suppliers (of capital) to the firm, not owners

of the firm

• Debt instruments have a finite life or maturity date

• Advantage is that the debt instrument is a contractual promise to pay with legal rights to enforce repayment

• Disadvantage is that return/profit is fixed or limited


Characteristics of Equity Markets Instruments

• Equity instruments (common stock is most prevalent equity instrument) • Buyers of common stock are owners of the firm• Common stock has no finite life or maturity date• Advantage of common stock is potential high income since return is not

fixed or limited

• Disadvantage is that debt payments must be made before equity payments can be made


Characteristics of Financial Markets

1. Debt Markets• Although less well-known by the average person, debt markets in U.S. are

much larger in total dollars than equity markets, due to greater number of participant classes (households, businesses, government, and foreigners) and size of individual participants (businesses, and government)

• Money Markets (Interbank Market)



2. Equity Markets• Although U.S. markets are highly efficient, the worldʼs largest, and more

familiar to the average person, they are far smaller than the U.S. debt markets largely due to the fact that the only applicable participants are businesses

• Stock Exchange Market



3. Commodity Markets• A commodity market is a physical or virtual marketplace for buying, selling

and trading raw or primary products, and there are currently about 50 major commodity markets worldwide that facilitate investment trade in approximately 100 primary commodities.

• Commodities are split into two types: hard and soft commodities. • 1) Hard commodities are typically natural resources that must be mined or

extracted (such as gold, rubber and oil), whereas• 2) Soft commodities are agricultural products or livestock (such as corn,

wheat, coffee, sugar, soybeans and pork).



• 4. Derivatives Market• The derivatives market is a financial market that trades securities that

derive its value from its underlying asset. The value of a derivative contract is determined by the market price of the underlying item. This financial market trades derivatives including forward contracts, futures, options, swaps and contracts-for-difference.



• 5. Forex Market• The forex market is a financial market where currencies are traded.

This financial market is the most liquid market in the world as cash is the most liquid of assets. The inter-bank market is the financial system that trades currency between banks.



1. Primary Market• New security issues sold to initial buyers

2. Secondary Market• Securities previously issued are bought

and sold



3. Exchanges• Trades conducted in central locations

(e.g., New York Stock Exchange)

4. Over-the-Counter Markets• Dealers at different locations buy and sell

NYSE home pagehttp://www.nyse.com

http://www.nyse.com/

Is my decision ethic?12 tests

• 1. Result test• 2. Fairness test• 3. Values test• 4. Universality test• 5. Moral Compass test• 6. Empathy test• 7. Damage to Public test• 8. Discussion test• 9. Participant test• 10. Benefit test• 11. Newspaper Headline test• 12. Daylight test



Financial Services• Financial products that that firms offer should meet certain standards

of integrity. These products should:• fit people’s needs• be financially sound• marketed in a responsible manner• be fairly priced• offer good value• suitable for the buyer



Financial Services• Firms should avoid:• false, misleading, deceptive claims• unfair pricing• conflict of interest• to abuse the trust invested in them• betraying customers• communication with customers that may contain omissions &

interpretations that give a misleading Picture of the truth.



Financial Services• Firms should disclose:• relevant information• level of risk• correct cost of each service & product



Financial Services• Firms have a duty:• to safequard customer assets & wealth• to execute customer instructions promply and accurately• to execute customer payments faithfully• to use the necessary skills and knowledge in serving the customer



Financial Management• BOB - Board of Directors• CEO - Chief Executive Officer (Chief Ethics Officer)• CFO - Chief Financial Officer• CRO - Chief Risk Officer• CTO - Chief Technology Officer• CIO - Chief Informations Officer• COO - Chief Operations Officer• CAO - Chief Audit Officer



Financial Management• 2002 Sarbenes-Oxley Act (section 406)• Companies should adobt a code of ethics for senior financial officers

to promote:• (1) honest & ethical conduct, including the ethical handling of actual

or apperent conflicts of interest between personal and proffecionalrelationships.

• (2) full, fair, accurate, timely, and understendable disclosure in theperiodic reports required to be filed by the issuer.

• (3) compliance with applicable governmental rules & regulations.



Financial Management

• Main ethical matters that arise for CFO:• Fraud• Accurate Accounting• Accurate Reporting• Conflict of Interest• Insider Trading





Fundamentals of Finance Ethics

Key elements of Ethics can be expressed as 6 Questions• The key elements of Ethics can be expressed as 6 Questions:• 1. Welfare: Is anyone being harmed, & if so, can the harm be justified• 2. Duty: What is my duty or obligation in this situation?• 3. Rihgts: Are anyone’s rights being violated, & if so, can the violation

be justified?• 4. Justice: Is everyone being treated fairly or treated justly? • 5. Honesty: Am I being entirely honest in my action?• 6. Dignity: Am I showing respect for all persons involved?



Force, Coercion, Fraud• Force• In a perfect market there is no place for force or coercion.• Coercion is defined as inducing a person to choose an undesirable

alternative under some threat, and such an action is not necessarilywrong as long as no right is violated.

• Fraud• Wrongful or criminal deception intended to result in financial or

personal gain.



Market Ethics principles• Market Ethics principles:• Do not lie• Do not steal• Keep your promises• Abide by agreements made (breach of contract)• Do not force customers to make financial decission. Let them use

their freedom & liberty to make their own choises.• Do not threaten customers for a decission or choise• Do not violate the rights of customers



Market Ethics Principles• Market Ethics Principles:• Do not hide important information from customers• Do not mislead customers by incorrect information• Do not confuse customer’s mind by technical or sofisticated

explanations• Always protect the customer’s welfare, assets and reputation• Tell the truth• Show due care to customers• Do not harm the customer



Agents, Fiduciaries, Professionals

• Agents, Fiduciaries, Professionals• An Agent is a party that has been engaged to act on behalf of

another, called the Principal.• A Fiduciary is a person or organization that has been entrusted with

the care of another’s (Beneficiary) property or assets and that has a responsibility to exercise discretionary judgement in this capacity solely in this other persons’ interest.

• Professionals are individuals who are working in financial institutions and providing financial services to their customers.



• Duties of Agents & Fiduciaries• Violation of an Agent’s duty:• To use principal’s property, assets or information for personal gain.

(self-dealing)• To do «Insider’s Trading»• Personal use of confidential information gained in an agency or

fiduciary relationship• It is wrong for a fiduciary to gain some personal benefit, even if the

beneficiary is not harmed.



• The duty of a fiduciary is to act solely in the interest of thebeneficiary within the scope of the relationship without gaining anymaterial benefit except with the konwledge and consent of thebeneficiary.

• The fiduciary relationship has two elements: 1) Trust & 2) Confidence• A Fiduciary relationship can be created by a contract, as when one

person (caaled Trustor) creates a trust & another agrees to be a «Trustee» who manages the trust.



The 3 elements of Fiduciary Duty• The 3 elements of Fiduciary Duty (CCL):• 1. Candor• «Candor» the quality of being open and honest; frankness and sincere in speech or

expression.• Everyone has an obligation of honesty or truth-telling.• It is wrong to say something wrong.• It is wrong to make a material misrepresentation.• Market actors are not required to disclose all information that others want to know.• A fiduciary has a duty of candor. Extensive obligation to disclose information that the

beneficiary would consider relevant to the relationship.• The director of a company would fail in a fiduciary duty by remaining silent about a

matter that is critical to a decision under discussion.



The 3 elements of Fiduciary Duty

• The 3 elements of Fiduciary Duty (CCL) :• 2. Care• A fiduciary should manage what is entrusted with due care.• Due Care is the care that a reasonable , prudent person would

exersise.• A fidiciary is expected not to act negligently.• A fiduciary has a duty to act in all matters with a high level of care.



The 3 elements of Fiduciary Duty

• The 3 elements of Fiduciary Duty (CCL):

• 3. Loyalty• A duty of Loyalty has 2 aspects:• 1) It requires a fiduciary to act in the interest of the beneficiary &• 2) To avoid taking any personal advantage of the relationship



Duty of Agents & Fiduciaries• Another importatnt duty of both Agents & Fiduciaries is to maintain

«Confidentialiy». • Agents & Fiduciaries have access to sensitive, privileged information

of the beneficiary.• Agent or Fiduciary provides assurances that the information will be

held in confidence & used only for the purpose for which it was provided.

• Agent or Fiduciary have a duty to avoid «Conflict of Interest»


Fundamentals of Finance EthicsRole of Professionals

3 Features of a Profession:

• 3 Features of a Profession:• 1) A specialized body of knowledge• Professionals possess a high developed tehcnical body of knowledge

that requires years of traning to acquire.

• 2) A high degree organization & self-regulation• 3) A commitment to public service



3 Features of a Profession:• 3 Features of a Profession:• 2) A high degree organization & self-regulation• Professionals have considerable control over their work & largely through

Professional Organizations,• They are able to set standards for practice & to discipline members who

violate them. • The standards of profession include both «Technical Standards» & «Ethical

Standards» • Ethical Standards are presented in a «Code of Ethics» «Ethics Code». A CoE

is the 1st step taken by an occupational group that is seeking recognition as a proffecian.

• A Code of Ethics is not an option, it is required by the natüre of professionalism itself.



3 Features of a Profession• 3 Features of a Profession:• 1) A specialized body of knowledge• 2) A high degree organization & self-regulation

• 3) A commitment to public service • The knowledge possessed by professionals serve some important

social need.• Professionals are committed to using their knowledge for the benefit

of all.



Conflict of Interest

• Conflict of Interest• A Conflict of Interest occurs when a personal or institutional interest

interferes with the ability of an individual or institution to act in theinterest of another party , when the individual or institution has an ethical or legal obligation to act in that other party’s interest.

• Conflict of Interest a situation in which a person is in a position toderive personal benefit from actions or decisions made in theirofficial capacity.




• Actual Conflict of Interest• ACI occurs when an individual or institution acts against the interest

of a party whose interest that individual or institution is pledged to serve.

• Potential Conflict of Interest• PCI is a situation in which an actual conflict of interest is likely to ocur.




• Personal Conflict of Interest• A lawyer who stands to benefit personally by acting against the

interest of a client is a PCI.• Impersonal Conflict of Interest• A lawyer who has two client with opposed interests faces a COI whici

is ICOI. (two masters problem)• How will a broker allocate a profitable security whic is in short supply

between his customers? Who to favour?• How to share the important market-moving information with clients?

First with large clients?




• Individual Conflict of Interest• An individual who acts as an agent & assumes fiduciary duties can fail to

serve the interests of a principle or the beneficiary of a trust even when no individual is at fault.

• Can an agent use the confidential information of his client & shre it with others? (confidential information)

• «Chinese Walls» can be built in the company to prevent the flow of confidential information.

• Organizational Conflict of Interest• One department in an organization shares the cpnfidential information of

ite client with another department.



Managing (Avoiding) Conflict of Interest

• How to manage (avoid) Conflict of Interest:• Disclosure &Transparency• Dislosure of adverse interests (politicians disclose their invest ment

holdings)• Detailed disclosure of transactions with «Affiliated Persons» • Disclosure of performance data of all kinds, including level of risks• Disclosure (announcing) of policies & procedures in advance• Sometimes disclosure may worsen the conflict of interest if the agent

uses this as an excuse saying that the other party is warned. Rationalisation of the behaviour that generates COI.




• How to manage (avoid) Conflict of Interest:• Rules, Policies & Procedures• Establish well written «Ethics Code», Policies & Procedures Mannuals• Specific rules, policies & procedures serve to reduce COI by

prohibiting conduct that constitutes or facilitates conflicts.• Broad (general, vague) rules & policies for financial companies are

likely to be less effective than finely crafted ones. •




• How to manage (avoid) Conflict of Interest:• Structural Changes:• COI in financial organizations result from combining different

functions in one firm.• COI in financial organizations result from combining different

functions in one single department.• COI in financial organizations result from combining different

functions in one single manager.




• How to manage (avoid) Conflict of Interest:• Structural Changes:• Separate the functions of Trust Management & Commercial Banking• Separate the functions of Underwriting & Investment Advising• Separate the functions of Retail Brokerage & Principal Trading• Build «Chinese Wall» to create impermeable barriers between

functional units• Seek Independent Judgement from outside the financial company

(independent trustees on the Boards of Mutual Munds, independent appraisers, independent proxy advisors)




• How to manage (avoid) Conflict of Interest:• Other Measures:• Training of personnel about COI with specific case studies.• Internal & External Audit of COI matters in the company.• Establish Committees to decide for important matters in the company. • Share important decisions of the company with personnel.• Establish «Approval Limits», «Transaction Limits» for management. • Establish «Ethics Red Line» to report COI.• Appoint «Ethics Officer» to consult on COI & resolve COI problems.





Ethics & the Retail Customer

• In serving Retail Customers financial services industry relies heavily on «Personal Selling».

• Personal Selling generates opportunities for abuse.• Customers who are unhappy blame the seller of the product,

sometimes unfairly.• There are «Bad Apples» in every industry. • Unethical sales practices in financial industry damaged the

reputation of banks & other financial institutions. (deception, manipulation, concealment, churning, abuse)



Deception & Concealment• A person is deceived when that person holds a false beleif as a result of

some claim made by another.• The claim may be either false or misleading statement. A statement that is

incomplete in some crucial way.• Regulators employ a three-factor test for deception:• 1) How reasonable is the person who is deceived? A customer of ordinary

intelligence & knowledge would draw a mistaken conclusion from a claim.• 2) How easily could a person avoid being deceived? A customer may check

dollar rate from internet, central bank site, tv, newspaper, etc.• 3) How significantly is the person harmed by the deception? A misleading

statement that leads to a trival loss. Deception that would lead a person to suffer a significant financial loss or some other grave harm.


Ethics & the Retail CustomerDeception & Concealment

1) How reasonable is the person who is deceived?

• Some people are more easily deceived that others.• Some claims could mislead only a few.• Regulations may seek to protect even the most ignorant consumer.• «Reasonable Person Standard». • Ask yourself this question. • «My a customer of ordinary intelligence & knowledge would draw a

mistaken conclusion from a claim?»



2) How easily could a person avoid being deceived?• Some information is widely available. Available everywhere. (TV,

Newspaper, Web Sites, Competitors)• Customer need not obtain that information only from the financial

company.• Some information is only available from the financial company. • Fees, commission rates, Value Date implementation, of the financial

company.• Such information that can only be reached from the financial

company is critical. If there is deception of such information the customer can not easily avoid it & may be harmed as a result.



3) How significantly is the person harmed by the deception?

• Sometimes deception may lead a person to suffer a significantfinancial loss or some other grave harm.

• This is a greater concern to regulators than a misleading statement that leads to a trivial loss.

• False & Misleading claims are morally objectionable because they are forms of «Dishonesty».



Concealment• Concealment of information is more problematic.• If the financial company hides from its customer an important information

which may change the decision of the customer how can the customer discover this before any harm is generated?

• Whether a claim is false or misleading a matter of fact.• Whereas what information ought to be revealed & not revealed involves a

value judgement. This is not an easy & straigtforward judgement.• This concealment behaviout sometimes may not be dishonest but is

certainly unfair. • Economic exchanges are generally considered to be fair if each party

makes a rational choice or at least has the opportunity to make a rationalchoise.


Ethics & the Retail CustomerConcealmentEconoomic Rationality

• In short, economic actors are assumed to be egoistic utility maximizers.

• The concept of «Economic Rationality» presupposes that:• 1. Both the Buyer & the Seller are capable of making a rational

choice.• 2. Both the Buyer & the Seller have sufficient information to make a

rational choice.• Neither the Buyer nor the Seller is denied the opportunity to make a

rational choice.



Responsibility to Protect

• What is the obligation of broker’s, agent’s, or other salespersons in finance to protect the interests of those who buy financial products?

• It can range from «Caveat Emptor» (let the buyer beware) to «Paternalism».

• The focus of a seller’s obligation is on the product itself & on the way in which it is presented.

• The decision to buy is left & the typical seller has no obligation to ensure that the buyer makes a wise choice.

• An underlying assumption of the market system is that buyers are the best judge of their own interests & should be free to make their own decisionsonce they are fully informed.


Ethics & the Retail CustomerResponsibility to Protect

Abuse

• What is «Abuse» in financial services?• Abuse is unfair advantage–taking. Trying to get unfair benefit by a

wrongdoing.• What constitutes Abuse? A difficult to answer question. Each case

should be analized differently (case by case approach).• People are generally more vulnerable in making investment decisions

than in making typical consumer purchases.• Therefore failure to protect the customer’s interests may be

regarded as «Abuse» or «Unfair Advantage-Taking».



Churning, Twisting, Flipping• «Churning» is Excessive or inappropriate trading for a client’s account by a

broker who has control over the account, with the intent to generate commission rather than to to benefit the client.

• «Twisting» is persuading a policy holder by an insurance agent, to replacean older policy with a newer one that provides little if any additional benefits, but generates a commission for the agent.

• «Flipping» is to replace an existing loan of a client by a bank officer, with a new one that usually provides the customer with some additional cash. By numerous fees & charges the client pays excessive cost for the sake of getting additional cash from the new loan.

• The poor are frequently targets of other abuses by loan providers.• It is a breach of a fiduciary duty to trade in ways that are not in a client’s

best interest.Ethics in Finance [email protected] 90


Churning• Legal definitions of «Churning» offered in court decissions are:• «Excessive trading by a broker disproportionate to the size of the

account involved, in order to generate commissions.»• «A situation in which brokers , exercising control over the frequency

& volume of trading in the customrer’s account initiates transactionsthat rea excessive in view of the character of the account.»

• The legal definition of Churning contains 3 elements:• 1. The borler controls the account• 2. The trading is excessive for the character of the acount• 3. The broker acted with intend



Churning

• Many brokers who have the authority to control an account still consult with the client & seek approval for specific trades.

• A broker may claim that the questionable trades were made with the knowledge & consent of the client.

• Some brokerage firms seek to cover themselves by sending «Comfort» or «Happiness» letters when a broker’s company notes unusual trading activity.



Churning• The most difficult issue in the definition of churning is the meaning of

«Excessive Trading».• 1. Whether trading is exessive depends on the character of the account.• A client who is a more speculative investor, willing to assume higher risk

for a greater return, should expect a higher trading volume. • 2. High volume is not the only factor; pointless trades might be considered

churning even if the volume is relatively low. • Examples are «in-and-out» trading or «switching» in which one stock is

replaced by another with similar characteristics, & «cross trading» blocks of stocks are transfered between two smilar accounts.



Churning• 3. Churning might be indicated by a pattern of trading that

consistently favors trade that yield higher commission.• Several attempts have been made to quantify «Excessive Trading».• ATR Annualized Turnover Ratio of a portfolio is used to quantify

Excessive Trading. (Turnover TL/Value of Portfolio)• 2-4-6 Rule• ATR 2 = Possible Churning• ATR 4 = Churning is presumed• ATR 6 = Conclusive proof of churning



Suitability• Salespeople have an obligation to recommend to his client only

suitable securities & financial products.• Suitability is is difficult to define precisely.• A legal suit alleging unsuitability must meet 3 tests:• 1. The broker has made a recommendation• 2. The security in question is unsuitable• 3. The broker has acted knowingly (with scienter)• «Know Your Customer» requires a broker to use due diligence in

learning the essential facts about a customer.



Suitability• The recommendation of an unsuitable security can be made out of

incompetence or negligence rather that with fraudulent intent.• The most common causes of unsuitability are. Recommending:• 1. Unsuitable types of securities (bonds vs stocks)• 2. Unsuitable grades of securities (low rate vs high rate)• 3. Unsuitable diversification (vulnerable to market changes)• 4. Unsuitable trading techniques (margin, option, swap, forward)• 5. Unsuitable liquidity (difficulty to liquidate the stock quickly)



Credit Cards Ethical Concerns

• Ethical concerns with Credit Cards, as well as Debit Cards, are usually broad.

• 3 important ethical concerns of credit & debit cards:• 1. Transparency• 2. Fairness• 3. Social welfare


Ethics & the Retail CustomerCredit Cards Ethical Concerns

Transparency

• Plastic Cards should be made available to consumers with full, accurate disclosure of relevant information.

• Interest rates• Service fees• Penalty fees• Payment requirements• Liability for unauthorized use• Resolution of disputes• Notification of changes• İnsurance details• Treatment of lost or stolen card expenses



Transparency

• All necessary information should be clearly disclosed in ways that can be easily known & understood by the card holder.

• The ethical principle is «Transparency»• All necessary details (terms & conditions) are usually expressed fully

in the standard credit or debit card contract (agreement).• The main problem of contracts are readability. Lack of readability.• The ability ot the card holder to read & fully understand in detail all

the terms & conditions mentioned in the card contract.• Card Issuers benefit from befuddled, ignorant customers.



Fairness

• In additon to ensuring that the terms of a card agreement are transparent, that is clearly known & understood, the second requirement is that the terms be «Fair».

• The typical credit card agreement raises questions of fair treatment (fair process) since they are presented to the applicant on a take-it-or-leave-itbasis.

• Because of imbalance of power, an applicant has virtually no opportunity to bargain or seek better terms elsewhere.

• Different portions of a cardholder’s balance often have different interest rates, & payments may be credited first to reduce the amount owed on portions that carry the lowest interest rate regardless of when this balance was incurred. Is this fair?



Social Welfare

• The third factor that raises ethical concerns about credit cards is their impact on «Social Welfare».

• The marketing of credit cards to people who cannot handle deptresponsibility may lead to:

• individual health problems, such as anxiety & depression• to family discord resulting in divorce & child neglect• to lifelong financial instability from impaired credit history & lack of

savings • Installment facility for credit cards? Is it ethical



Other Ethical Concerns for Credit Cards

• Marketing credit cards to students• Students are victims of manipulation• Marketing on campus (carnival atmosphere & free gifts)(freshman or fresh meat)• Assessing creditworthiness• Rates & Fees• Banks follow the standard practice of maximizing their revenues from plastic

cards.• Bank’s computers are programmed to enter transactions so as to maximize the

number of overdrafts which creates the highest yield to the bank.• Exchange rates used to convert credit card foreign exchange payments to TL?• Cash Advance fees?• ATM transaction fees on cards?



Other Ethical Concerns for Credit Cards

• Rates & Fees• Credit card campaigns? To give incentives to poor customers to use

their credit cards to end in payment difficulty. Is it ethical?• To increase the credit card limit of a customer who can not pay?• When to start calculating interest on credit cards? (purchase date,

statement date, last payment date)• Annual fees on credit cards?• Applying high interest rate for over-limit card payments?



Credit Cards Ethical Concerns

• Plastic Cards should be made available to consumers without• Deception• Concealment• Guile



Mortgage Lending Ethical Issues


USA Subprime Loan Crises


Mortgage Broker Ofisinde


Ev almakistiyorum ama önödeme yapacakbirikimim yok. Birde aylık taksiködemeleriniyapcak gücümyok. Banayardımcı olabilirmisiniz?

Tabiki. Alacağınızevin değeriher zamanartacaktır. Önödemeyapmanızaartık gerekyok.

Mortgage Broker Ofisinde – Hayallerinizi Gerçek Yaparız.


Önden birkaç yıl size düşük faiz uygularız. Faiz oranını dahasonraki yıllarda arttırırız. Olur mu?Olur. Sorun yok.

Ancak bir şeydaha var. Patronum birazaksidir. Çalıştıığımı size belgeleyemem. Bu bir problem olur mu?

Sorun yok. Sizi özel“BeyanaDayalı Kredi” kategorisinesokarız. Kendi işinizive gelirinizikendinizbeyanedersiniz.




Şiz şahanesiniz. Benim gibilerlehakikatençalışmakistiyorsunuz.

Parayı size biz vermiyoruz ki. Banka verecek. O nedenle krediyi geriödemişsinizödememişsiniz biziilgilendirmiyor. Biz her halukardakomisyonumuzuBankadan alıyoruz. Hadi

başlayalımo zaman.


Birkaç hafta sonra Bankada . . . . .


First BANK’da – Yılbaşı Hesabınızı Bugün Açtırın

Mortgage KrediDosyaları

Bu kötü kredilerdenkurtulmam lazım. Bilançomu bozacak. New York’taki YatırımBankasındaki dahiarkadaşlar sağ olsun, bunları satın alacaklar.Sihirbaz bunlar.Hemen arıyayım.


Şimdi New York Yatırım Bankasındaki Zeki Çocuklar Ne Yapıyor Bakalım


RGS Yatırım Bankası – Tüm Yatırım İhtiyaçlarınız için Zeki Arkadaşlarımıza Güvenin

Püfff ! Dosyalarımızımahvetmeden bu kötükağıtlardan kurtulmamızlazım.



Ama bunları kim satın alırki Patron?



Anladım. Bu kötümortgage kredileriniteminat gösterip Kağıtihraç edeceğiz. Bu kağıtlara Garantili BorçSenetleri deriz. Bu kağıtları yatırımcılarasatarız. Kredilerödendikçe paralarınıalırlar. [email protected] in Finance 116


Ama çöp çöptür. Öyledeğil mi? Bu iş nasılolacak anlıyamadım?



Doğru söylüyorsun. Amabir havuz oluşturursak buhavuzdaki sadece bazıkrediler batar. Hepsibatmaz ya. Ev fiyatları her zaman arttığı için de kalansağlıklı kredilerdenyapılacak tahsilatlar yeterliolur.



Hala anlamadımPatron !



Garantili Borç Senedişöyle işleyecek. Üçbölümden oluşacak. 1.ciye “İyi” 2.ciye “Azİyi” 3.cüye de “Kötü” deriz.



Bazı kredilerbatarsa, biz önce“İyi” gurubu öderiz. Sonra “Az İyileri” öderiz. En son da“Kötü” gurubuöderiz.



Anlamaya başladımgaliba. “İyi” Gurubunriski az olduğu içinonlara diğerlerinden azfaiz öderiz. “Azİyi” guruba biraz daha fazlafaiz “Kötü” guruba daen yüksek faizi öderizdeğil mi Patron?



Aynen öyle. Ama dur dahaiyisi var. “İyi” guruba bir de Sigorta Policesi alırız. Bunuyaparsak Rating Şirketi bukağıtlara yüksek Not verirAAA veya A. “Az İyilere” BBB veya B verir. Fena sayılmaz. “Kötü” portföye not almayagerek yok.



Riskli mortgage kredileri ile AAA veBBB ratingi olankağıtlar yaratmayıbaşardınız Patron. Vallahi siz bir dahisinizPatron !

Evetbiliyorum



Şimdi bu 3 gurup kağıdıkimesatacağızPatron?



SEC’dekiinsafsızlar bukağıtları dulayetimesatmamıza izinvermezler. Biz de KurumsalYatırımcılarasatarız.

YanikimesatarızPatron?



Sigorta Şirketlerine, Bankalara, Norveç’teki Kasaba Belediyelerine veyaFonlarına, Kansas’taki Okul Yönetimlerine, yüksek verim peşinde olan veGüvenli yatırım isteyenlere satarız.



“Kötü” gurubukimse almazdeğil mi Patron?

Tabi ki almaz. Kimse okadar aptal değildir. Onları kendiportföyümüzde tutarızve kendimize çokyüksek faiz öderiz.



Güzel de garantisi kötümortgage kredileri olankağıtları biz Bilançomuzdagösterecekmiyiz?



Tabi ki biz Bilançomuzdagöstermiyeceğiz. Muhasebe kurallarıyazanlar bizeCaymen Island’daOff Shore Paravanbir Şirket kurup kötükağıtları onasatmamıza izinveriyor. Kötü KağıtlarParavan ŞirketinBilançosundagörünecek. Bununadı “Özel MaksatlıAraç” olacak.


Çok güzel Patron. Ama bunuyapmamıza niçinizin veriyorlar? Kendi pisliğimizibir yerden diğerbir yeresüpürdüğümüzügörmuyarlar mı?

Tabiki görüyorlar. Biz onları inandırdık. Amerikan malisisteminin sağlığıaçısındanyatırımcılarınkompleks işlemlerindeyatını bilmesigerekmiyor dedik.



Şimdi de Muhasebecilerin Bağamsız Dış Denetim Şirketlerinin ne yaptıklarınaBakalım.


CZAR BAĞIMSIZ DENETİM ŞİRKETİ

Yatırımcı vesorumluvatandaşolarakFinasmanŞirketlerininMali Tablolarınıhazırlarkendaha ŞeffafAçık ve Dürüstolmalarınızorlamanızıistiyorum.


CZAR BAĞIMSIZ DENETİM ŞİRKETİ

Bana küfür et


Felaketin geldiğini göremedik


Norveç’te Kasaba Emekli Fonu RSG Yatırım Bankası

Hey Beyim, Ne oluyor orada?Biz aylıködemelerimizialamıyoruz.


Evet ben de sizi arayacaktım. Burada işler kötü. Sizinaldığınız Kağıtların teminatıolan Mortgage Kredileritaksitlerini ödemiyorlar.


Bir Dakika. Biz RatingiAAA olan “İyi” Kağıtlarıalmıştık.Garantili Kağıtları. Önce Bize ödemeyapılmalıydı.



Vallahi krediler umduğumuzdanbiraz daha kötü çıktı. Ödemelerçok azaldı. İnan olun ki biz de sizinkadar şaşkınız ve hayal kırıklığınauğradık.

RSG Yatırım BankasıNorveç’te Kasaba Emekli Fonu



Ama siz ev fiyatları hep artardemiştiniz. Kredi ödemelerinde sorunolmaz demiştiniz.



Evet demiştik. Yanlış varsayımdabulunmuşuz.Özür dileriz.


RSG Yatırım BankasıNorveç’te Kasaba Emekli Fonu

Kötü varsayım.Peki DerecelendirmeKurumu aldığımız KağıtlaraAAA Rating notu vermişti? Ne oldu bu nota?



DerecelendirmeKuruluşları da bu işiEllerine YüzlerineBulaştırdılar.Özür diliyorlar.



Ama bu KağıtlarSigortalıydı.Sigorta Şirketine ne oldu?



Şaka mı yapıyorsunuz?Sigorta Şirketlerinin de burezaleti ödeyecek kadarparaları yok. Onlar daçuvalladı. Özür diliyorlar.



Büyükskandal.Ben KasabaHalkına ne diyeceğimşimdi?



Beceremediğini söyle.


Allah Belanızı Versin!



Senin de ! ! !



Mutlu Son





Ethics in Investment

Mutual Funds

• A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.

• Mutual funds are operated by Professional Money Managers , who allocate the fund's investments and attempt to produce capital gains and/or income for the fund’s investor.

• A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.



Mutual Funds

• 3 Ethical Issues in managing a Mutual Fund:

• 1. Market Timing • 2. Late Trading• 3. Personal Trading• 4. Soft-Dollar Brokerage


Ethics in InvestmentMutual Funds

Market Timing

• «Market Timing» is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data in order to benefit from temporary changes in security prices.

• "Market-timing trades are short-term, in-and-out buying and selling to take advantage of news announced during the hours before the next day's price is set."

• The market timer seeks to sell at the "top" and buy at the "bottom.»• Market timers are more likely to use leverage in order to produce better results.• Market Timing is especially attractive in international funds due to time lag in distant

markets. • Although that sort of trading is not illegal, it is certainly unethical when fund companies

prohibit the practice and then secretly allow it for a favored few investors.


https://www.investopedia.com/terms/t/technicalindicator.asp


Late Trading

• «Late-day trading», or late trading, occurs when hedge funds place orders to buy or redeem mutual fund shares after the time at which the net asset value is calculated, but receive the price based on the prior NAV already determined that day. These trades violate federal securities laws and defraud innocent investors.

• Illegal late-day trading schemes involve hedge funds working out special relationships with mutual funds to buy and sell shares after hours but record the trades at 4:00pm Eastern Time.

• The practice provides hedge funds with an opportunity to profit when new information is released after market close.

• Late trading of mutual fund shares occurs when investors placing trades after 4 PM receive the 4PM price. These latetraders can use the information revealed after 4 PM to guide their trades: buying funds whentheir current value is greater than their 4 PM value and selling the funds when the reverse is true. Doing so allowsthem to earn expected abnormal returns at the expense of the fund's long-term shareholders.



Market Timing

• What is wrong with timing?• 1. It allows a few favored clients to trade under terms that are

unavailable to the vast majority of ordinary investors. (unequal treatment & no transparency)

• 2. Allowing market timing hurts long-term mutual fund investors by increasing a fund’s expense by adding other overhead costs & reducing its returns.

• 3. Market timing is unfair & harmful to ordinary investors.• 4. Directors & executives of mutual fund companies are violating a

fiduciary duty to serve investors’ interests.



3 Important Principles for Dealing with Customers

• 3 Principles:• 1. You must deal with clients “Fairly” and “in Good Faith”.• 2. You must never put the interests of your firm ahead of the

interests of the customers.• 3. You must never compromise your personal ethics or integrity, or

give the appearance that you may have done so.



Reforms Proposed to Manage Mutual Funds

• In the wake of mutual fund scandal, the following reforms have been proposed:

• 1. Governance

• 2. Disclosure

• 3. Pricing




• 1. Governance• Board of Directors of mutual funds serve in dozens of boards.• Many of the Board of Directors are also company executives.• Many Board of Directors are not independent.• Many Board of Directors face a “Conflict of Interest” problem.• Limit the number of Boards each Board Member may serve.• Increase the number of “Independent” Board Members.• Require that the Chairman of the Board be an “Independent”

member.




• 1. Disclosure• Lack of disclosure makes it difficult for investors to detect losses or to

asses the costs of a fund & compare the returns with competing funds.

• Disclosure of information about a fund’s expenses that would enable investors to determine whether they are receiving adequate value for the fees they pay & whether their return is being reduced by market timing & other abuses in mutual fund trading.




• 1. Pricing• Market Timing, especially in international funds , is possible because

of the problem of “Stale Prices”.• If the net asset value of a fund that is reported at four o’clock New

York time does not accurately reflect the current prices of the securities in the fund’s portfolio, than an opportunity for“stale price arbitrage” exists.

• Mutual Funds should implement “Fair-Value Pricing”.



Personal Trading

• “Personal Trading”• Mutual Fund Managers wear two hats.• They manage money for others.• But they also trade for their own accounts.• Even though most fund managers refrain from giving stock tips, they

still have immense opportunity to benefit personally from their privileged position.



Personal Trading• “Personal Trading”• Conflict of Interest from personal trading is possible for so-called “Access

People”, that is investment company personnel such as portfolio managers, analysts, and traders who have access to proprietary research & information about pending transactions.

• Access People are in a position to use this information to trade ahead of a fund’s purchase (called frontrunning) & benefit from any upward price movement.

• An access person might be in a position to influence transactions that serve primarily to protect or promote that person’s investment in a security.

• Conflict of Interest also arise when a fund manager allocates a security that is in short supply.



Personal Trading

• In order to prohibit any fraudulent, manipulative act by an access person in the purchase or sale of any security, SEC issued the following Rule:

• 1. Prohibits directors, officers & employees of investment companies (and the investment advisers & principal underwriters ) from engaging in fraudulent, manipulative or deceptive conduct in connection with their personal trading of securities held or to be acquired by the investment company.

• 2. Requires investment companies to adopt code of ethics & procedures reasonably designed to prevent trading prohibited by terule.



Personal Trading

• 3. Requires every “access person” to file reports with the firm concerning his or her personal securities transactions, within ten days of the end of the quarter in which the transaction was effected.

• 4. Requires investment companies to maintain records related to the implementation of their procedures.



Soft-Dollar Brokerage

• “Soft-Dollar Brokerage”• The term soft dollar refers to the payments made by mutual funds (and other money managers)

to their service providers. The difference between soft dollars and hard dollars is that instead of paying the service providers with cash (i.e. hard dollars), the mutual fund will pay in-kind (i.e. with soft dollars) by passing on business to the brokerage.

• Soft dollars are a means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard-dollar fees). The investimg public tends to have a negative perception of soft-dollar arrangements, because they believe that buy-side firms should pay expenses out of their profits, rather than from investors' pockets. As such, the use of hard-dollar compensation is becoming more common.

• The costs of research and other bundled services provided in the soft-dollar transaction are essentially borne by the mutual fund investor, yet they are not disclosed by the fund. They are simply built into the cost of trades, which impacts the long-term performance of the fund.



Relationship Investing

• “Relationship Investing” may be defined as a situation in which an investor takes an active interest in a corporation and attempts to influence the corporation’s operations.

• Taking an active role in corporate governance has also been pursued as an investment strategy by some institutional investors, especially hedge funds, as an effective way of increasing returns.

• However institutional investors are typically both shareholders and fiduciaries, which creates the potential for conflicts between these two roles.

• Relationship investing enables present shareholders to bring about the same kind of changes that a raider in a hostile takeover might make.



Socially Responsible Investing• “Socially Responsible Investing” can be as simple as a policy to avoid

“Sin Stocks”. (alcohol, tobacco, gambling, money laundering, smuggling, white slavery, weapon trading, pollution)

• These funds identify themselves by many names:• Socially Responsible Investing• Ethical Investing• Sustainable Investing• Triple Bottom-Line Investing• Environmental & Social Issues Investing• Governance Investing



Microfinance

• “Microfinance”, also called microcredit (microlending) , is a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise have no other access to financial services. (unbankables) (Banngladesi Muhammad Yunus, Grameen Bank)

• While institutions participating in the area of microfinance are most often associated with lending (microloans can be anywhere from $100 to $25,000), many offer additional services, including bank accounts and micro-insurance products, and provide financial and business education.

• Ultimately, the goal of microfinance is to give impoverished peoplean opportunity to become self-sufficient.



Microfinance

• The challenge of microfinance is how to achieve 3 aims:• 1. Assuring high rates of repayment.

• 2. Becoming self-sustaining, thereby avoidng a reliance on subsidies or contributions.

• 3. Improving people’s lives.



Microfinance

• The secret of microfinance is “Group Lending”• Two members of a group each receive a small loan with an initial

payment due quickly, followed by a frequent repayment schedule.• If these members make payments, the next two receive small loans

sometime later, followed last of all by a loan to the fifth member. (Dynamic Incentive)

• When the first round is complete, members are eligible forsuccessively larger loans (Progressive Lending).

• Although all transactions are recorded, no contracts are signed; obligations are based instead on social relationships.



Microfinance

• Some ethical issues “dark side” of microfinance:• High interest rates• Pressure to secure payments.• Group collateral (guarantee) obtained for a single loan.• How well microfinance actually address the financial needs of the

poor.• Does microfinance increase the income of the poor?• Withdrawing credit from all members of the group if any one

borrower defaults (collateral substitutes). Crete powerful peer pressure to make payments.





Ethics in Financial Markets

• The broad aim of financial market regulation is to secure “Fair & Orderly” market “just & equitable principles of trade”.

• The concepts of “Fairness”, “Justice” and “Equity”.• Fairness, Justice & Equity serve mainly to forbid fraud and

manipulation, the violation of certain rights and the exploitation of asymmetries in such matters as information and bargaining power.

• Prohibitions of unfair market practices are designed to protect both market participants and the integrity of markets themselves.

• Specific areas where unfairness is often alleged are: • 1. Insider Trading 2. Hostile Takeover 3. Financial Engineering





1. Debt Markets• Short-Term (maturity < 1 year) Money Market• Long-Term (maturity > 1 year) Capital Market

2. Equity Markets• Common Stock



Characteristics of Debt Markets Instruments

• Debt instruments • Buyers of debt instruments are suppliers (of capital) to the firm, not owners

of the firm

• Debt instruments have a finite life or maturity date

• Advantage is that the debt instrument is a contractual promise to pay with legal rights to enforce repayment

• Disadvantage is that return/profit is fixed or limited



Characteristics of Equity Markets Instruments

• Equity instruments (common stock is most prevalent equity instrument) • Buyers of common stock are owners of the firm• Common stock has no finite life or maturity date• Advantage of common stock is potential high income since return is not

fixed or limited

• Disadvantage is that debt payments must be made before equity payments can be made




1. Debt Markets• Although less well-known by the average person, debt markets in U.S. are

much larger in total dollars than equity markets, due to greater number of participant classes (households, businesses, government, and foreigners) and size of individual participants (businesses, and government)




2. Equity Markets• Although U.S. markets are highly efficient, the worldʼs largest, and more

familiar to the average person, they are far smaller than the U.S. debt markets largely due to the fact that the only applicable participants are businesses




1. Primary Market• New security issues sold to initial buyers

2. Secondary Market• Securities previously issued are bought

and sold




3. Exchanges• Trades conducted in central locations

(e.g., New York Stock Exchange)

4. Over-the-Counter Markets• Dealers at different locations buy and sell

NYSE home pagehttp://www.nyse.com

http://www.nyse.com/


Fairness• The main aim of financial market regulation is to ensure both

“Fairness” and “Efficiency”.• Unfair markets tend to drive people away and thereby reduce

participation.• Efficiency is itself an ethical value. Achieving the maximum output

with the minimum input.• However “Fairness” and “Efficiency” can sometimes conflict.



Fairness in Markets• Fairness in Markets• The core meaning of fairness involves at least two familiar ideas:• 1. Fairness consists of treating people equally in accord with some

rule, agreement, or expectation (equal treatment) (fair deal, fair game).

• 2. Outcomes be in accord with justified rules. Fairness requires not merely that the rules be consistently applied but that they also be the right rules. Otherwise the outcome of the equality applied rules would still be unfair.



Fairness in Markets

• Fairness is often relevant when some goods or some benefits and burdens are to be distributed.• Thus we should aim to distribute the good of income or the benefits and the burden of taxation

fairly.• Fairness is an important element also in “Financial Reporting”. • Fair presentation of company’s financial positon and results of operations (Balance Sheet &

Income Statement) is important.• Company itself should be fair in making disclosures.• Corporate Governance should ensure the fair treatment of shareholders, investors, customers,

employees, suppliers and other stakeholders.


Ethics in Financial MarketsFairness in Markets

Fraud & Manipulation• The definition of fraud involves 5 elements:• 1. Making of a false statement or misrepresentation. Sometimes

false must be stated, written, implied or otherwise conveyed.• 2. A material fact, that is, it must involve some factual matter that

can be characterized as true or false and that it is important in some way (material) to a decision.

• 3. The party making the statement or representation must know that it is false and thereby intend that others be deceived.

• 4. It is necessary in fraud that the other party actually relies on the false statement or misrepresentation in making a decision.

• 5. That party must suffer some loss or other harm from this reliance. Ethics in Finance [email protected] 185


Fraud & Manipulation• Manipulation generally involves the buying or selling of securities for

the purpose of creating a false or misleading impression about the direction of their prices so as to induce other investors to buy or sell the securities at prices that are disadvantageous to them.

• Like fraud manipulation is designed to deceive others, but the effect is achieved by creation of false or misleading appearances rather than by false or misleading representations.



Equal Information

• In all markets information is a valuable commodity. Those who possess it have a great advantage over those who lack it.

• Competition between parties with very unequal information is often regarded as unfair.

• The possession of unequal information strikes us as unfair mainly when the information has been illegitimately acquired or when its use violatessome obligation to others.

• Insider trading can also be criticized on the grounds that others do not have the same access to the information, which leads us to the question of equal information, namely equal access.

• Another argument against insiders trading is that insiders use informationthat is not merely costly to obtain but that cannot be obtained by an outsider at any price. In other words, the information is inherentlyinaccessible.



Equal Bargaining Power

• “Equal Bargaining Power” Generally, agreements reached by arm’s-length bargaining are considered to be fair, regardless of the actual outcome.

• Agreements can be criticized as unfair, when one party takes undue advantage of a superior bargaining position.

• Unequal bargaining power can result from many sources:- unequal information- unequal resources- unequal processing ability- other vulnerabilities- other weaknesses

• In most transactions wealth is an advantage. The rich are better able than the poor to negotiate over almost everything. Rich have more bargaining power.



Insider Trading• Insiders Trading• “Insider Trading” is commonly defined as trading in the stock of publicly

held corporations on the basis of material, nonpublic information.• Corporate executives and directors are definitely “insiders”, but some

“outsiders” have also been charged with insider trading. - printer who was able to identify the targets of several takeovers from legal documents given to him for printing.- a stockbroker who was tipped off by a client who was a relative of the president of a company who told him about the future sale of the company to big holding group.- a lawyer who got all the information from his client about an IPO and shared this information with his wife to buy the shares at low price and sell after IPO at high price.



Insider Trading• An outsider person who receives information from an insider and who

knows that the insider source is violating a duty of confidentiality is also accepted as acting against insider trading rules.

• However, a person who has no fiduciary ties who receives informationinnocently (by overhearing a conversation) would still be free to trade.

• Everyone who could be called an insider has a fiduciary duty to serve the interests of the corporation and its shareholders, and the use of information that is acquired while serving as a fiduciary, for personal gain, is a violation of this duty.

• Those who trade on material nonpublic information are essentially stealing property that belongs to the corporation.

• By analogy, insider trading is like playing poker with a marked deck.



Hostile Takeovers•

What is a 'Hostile Takeover'• A hostile takeover is the acquisition of one company (called the target

company) by another (called the acquirer) that is accomplished by going directly to the company's shareholders or fighting to replace managementto get the acquisition approved.

• A hostile takeover is an acquisition that is opposed by the management of the target company.

• A hostile takeover can be accomplished through either a «tender offer» or a «proxy fight».


• Friendly: the companies cooperate in negotiations target is unwilling to be bought or the target's board has no prior knowledge of the offer

• Reverse Takeover: a smaller firm will acquire management control of a larger company and keep its name for the combined entity.

• Reverse Merger: a deal that enables a private company to get publicly listed in a short time period. It occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets.


Types of Acquisitions

Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome.


� Back-end� Bankmail� Crown Jewel Defense� Flip-in� Flip-over� Golden Parachute� Gray Knight� Greenmail� Jonestown Defense� Killer bees� Leveraged recapitalization� Lobster trap

� Lock-up provision� Macaroni Defense� Nancy Reagan Defense� Non-voting stock� Pac-Man Defense� Pension parachute� People Pill� Poison pill� Poison Put� Safe Harbor� Scorched-earth defense� Shark Repellent

� Standstill agreement� Staggered board of

directors� Targeted repurchase� Top-ups� Treasury stock� Trigger� Voting plans� White knight� White squire� Whitemail

Tactics against Hostile Takeovers



Tactics against Hostile Takeovers• Shareholders Rights Plan (Poison Pill Flip-in)• (Poison Pill Flip-in)• Under such plans, shareholders can purchase additional company stock at

an attractively discounted price, making it far more difficult for the corporate raider to take control.

• (Poison Pill Flip-over)• Enables stockholders to purchase the acquirer’s shares after the merger at

a discounted rate. For example, a sahreholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.



Tactics against Hostile Takeovers• Staggered Board of Directors• Groups of (B of D ) directors are elected at different times for

multiyear terms, can challenge the prospective raider. Buyer can not change all board members at the same time.

• Greenmail• A company may also pursue the greenmail option by buying back its

recently acquired stock from the putative raider at a higher price in order to avoid a takeover.



Tactics against Hostile Takeovers• White Knight• a strategic partner that merges with the target company to add value and

increase market capitalization. • Increasing Debt (Jonestown Defense)• By increasing debt significantly, companies hope to deter raiders concerned

about repayment after the acquisition.• Making an Acquisition• Make an acquisition, preferably through stock swaps or a combination of

stock and debt. This has the effect of diluting the raider's ownership percentage and makes the takeover significantly more expensive.



Tactics against Hostile Takeovers• Acquiring the Acquirer ( Pac-Man defense)• To turn the tables on the acquirer and mount a bid to take over the raider.

This requires resources and shareholder support, and it removes the possibility of activating the other defensive strategies.

• Voting Rights Plans (Dual Class Stock)• Targeted companies may also implement a voting-rights plan, which

separates certain shareholders from their full voting powers at a predetermined point. «Preffered Shares» with more rights give old shareholders more effective voting rights. (A type, B type shares)



Tactics against Hostile Takeovers• Golden Parachute• Put a special clause in the employee agreement of the CEO and other

top managers that in case of take-over they should be given high salary and bonuses.

• People Pill• Threaten the acquirer that in case of takeover top management key

personnel will resign and leave the company.



Tactics against Hostile Takeovers• Lady Macbeth Strategy• Somebody from the company acts on the side of the acquirer first

during takeover discussions and uses insider information later to block the takeover.

• Crown Jewels Defense• All the personnel in a key department of the company will resign and

leave the company if there is a takeover.



Financial Engineering• Financial engineering is the use of mathematical techniques to solve

financial problems. Financial engineering uses tools and knowledge from the fields of computer science, statistics, economics, and applied mathematics to address current financial issues as well as to devise new and innovative financial products.

• All derivatives involve a contract made at some point in time (now) with a settlement or delivery date set sometime in the future.

• On or before that date either one party or both is committed to an exchange (is obligated to complete it) or else one party has a right(but not an obligation) to insist that the exchange take place (this is an option).



Financial Engineering• Derivatives are zero-sum games in which one party gains only to to the

extent that the other looses.• The exchange has no impact on the wealth of the whole economy.• Derivatives: • Swaps (exchange swap & interest swap) , • Options (call option «buy» & put option «sell») , • Forwards, (agree today the terms & conditions today with an obligation to

settle in a futue date) (forward buy & forward sell)• Futures, (value is determined on a Daily basis & may be sold any time prior

to the specified date)



Financial Engineering

• CAMP Capital Asset Pricing Model• CDS Credit Default Swap is an insurance policy in which one party

agrees, for a payment, to compensate the other party in the event that a borrower defaults on a loan.

• CDO Collateralized Debt Obligation is a structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors.



Financial Engineering• Problems with Derivatives:• 1. These financial instruments are used for speculation, in ways that pose

undue risks that make them socially undesirable.• 2. Some of the derivatives that have been sold, especially by major banks,

have been unsuitable for relatively unsophisticated clients. And the issuing banks take advantage of such unsophisticated client to generate benefit for the bank.

• 3. Proper disclosure is not made to the buyers about the derivative risks. Some degree of disclosure or transparency is owed, not only about material information on the securities themselves but also of any conflicts of interest the sellers may have should be communicated to the buyers.





Ethics in Financial Management

• A fundamental tenet of financial management is that the objective of the corporation is Shareholder Wealth Maximization (SWM).

• Possible measures of SW are: • 1.accounting profits (earnings per share) • 2.cash flow (dividends)• 3.share price. (share value)• All these accounting information may be manipulated to some extent

within (GAAP) Generally Accepted Accounting Standards (by fraud in violation of GAAP) (e.g Enron, Worldcom)



• Profits do not take account of the cost of capital. • Company could make profits and still be losing money.• (EVA) Economic Value Added measures only profit in exec of capital

cost.• (CSR) Corporate Social Responsibility is an ethical issue for companies.• CSR addresses the social costs of production, such as pollution. It is

included to cost of production.


ØUnethical implementation or behavior in a bank may be due to managing operations risks that involve:

1.personnel 2.processes 3.systems or 4.events


Ethics in Bank Operations

• What are operational risks?• Banks and other financial institutions face losses from a failure to manage

internal processes and systems. • Operational risk arises from disruptions to daily operations that contribute

to direct or indirect losses. • Managing and understanding key operational risk has grown exponentially

over the past few decades. This has generated a need to implement tools and industry techniques to provide a sound operational risk management solution.

• This is essential for institutions hoping to attain their goals and business objectives quickly and successfully.




• What causes operational risks? • Operational risk management has become even more prominent over the

past few years. • Financial institutions, using the latest financial software technology, have

grown tremendously in size, and are engaged in developing multi-structured and multi-layered products and services.

• This has made the overall operations within these institutions very complex and difficult to handle.

• This environment has led to a significant increase in several kinds of risk. • There are both internal and external contributing factors.




• Internal fraud – Acts of fraud committed internally in an organization go against its interest. Losses can result from intent to defraud, tax non-compliance, misappropriation of assets, forgery, bribes, deliberate mismarking of positions and theft.

• External fraud – External frauds are activities committed by third parties. Theft, cheque fraud, and breaching the system security like hacking or acquiring unauthorized information are the frequently encountered practices under external fraud.




• Employment practices and workplace safety – Non-compliance to employment or health-and-safety laws and regulations are grave operational hazards in any organization.

• Incompetent maintenance of employee relations takes a toll on employees, claiming their well-deserved compensation and benefits.

• Unethical termination criteria and discrimination are other operational risks that subject institutions to serious financial and reputational damage.




• Clients, products, & business practice – Organizations fail to meet promises made to their clients as a result of unintended circumstances rising from negligent practices.

• Privacy and fiduciary breaches, misuse of confidential information, suitability issues, market manipulation, money laundering, unlicensed activities and product defects are very common practices that lead companies to face lawsuits.

• There are many intentional and unintentional malpractices exercised in the business world.

• Entrepreneurs should learn the do’s and don’ts before starting up.




• Damage to physical assets – These are losses incurred by damages caused to physical assets due to natural disasters or other events like terrorism and vandalism.

• Rapid and unexpected changes in climatic conditions have been a constant cause of concern in the business world for more than a decade in recent history.




• Business disruption and systems failures – Supply-chain disruptions and business continuity have always been a big challenge for banks.

• System failures (hardware or software), disruption in telecommunication, and power failure can all result in interrupted business and financial loss.




• Execution, delivery, & process management – Failure in delivery, transaction or process management is an operational risk that has the potential to bring loss to a business.

• Errors in data entry, miscommunication, deadline misses, accounting errors, inaccurate reports, incorrect client records, negligent loss of client assets and vendor disputes are operational risk events that could bring about legal threats to the organization.




• Operational risks can be mitigated efficiently if bankers learn the core operational vulnerabilities of their businesses, and set the risk indicators accordingly.

• And the right way of dealing with it is to educate employees to analyze and manage operational risks on a daily basis.

• Operational risk causes are evolving periodically and banks need to develop an innovative eye to tackle them.

• Poor management of operational risks can also damage the credibility, reputation and finances of an organization.


Chartered Financial AnalystsCFA Institute

Code of Ethics


Members & Candidates of CFA Institude• Must: (6 things)

• 1. Act with Integrity , Competence, Diligence and Respect and in an Ethical Manner with the Public, Clients, Prospective clients, Employers, Employees, Colleagues in the investment profession, and other participants in the global capital markets.

• Integrity (the quality of being honest and having strong moral principles)

• Competence, the ability to do something well, careful and using a lot of effort & successfully

• Diligence (careful and persistent work or effort)

• Respect, a feeling of deep admiration felt or shown for someone orsomething that you believe has good ideas or qualities


https://dictionary.cambridge.org/dictionary/english/ability

https://dictionary.cambridge.org/dictionary/english/careful

https://dictionary.cambridge.org/dictionary/english/effort

https://dictionary.cambridge.org/dictionary/english/admiration

https://dictionary.cambridge.org/dictionary/english/felt

https://dictionary.cambridge.org/dictionary/english/shown

https://dictionary.cambridge.org/dictionary/english/believe

https://dictionary.cambridge.org/dictionary/english/idea

https://dictionary.cambridge.org/dictionary/english/quality

Members & Candidates of CFA Institude

• Must:

• 2. Place the integrity of the «Investment Profession» and theinterests of «Clients»

• above their own Personal Interests.



• Must:

• 3. Use Reasonable Care and exercise IndependentProfessional Judgment

• when conducting:• a)«Investment Analysis», • b)making «Investment Recommendations», • c)taking «Investment Actions», and• d)engaging in other «Professional Activities».



• Must:

• 4. Practice and Encourage others to practice in a «Professional Manner» and «Ethical Manner»

• that will reflect credit on themselves and the profession.



• Must:

• 5. Promote the «Integrity» and «Viability» of the global capital marketsfor the ultimate benefit of society.

• Integrity (the quality of being honest and having strong moral principles)

• «Viability» , ability to work successfully.



• Must:

• 6. Maintain and Improve their «Professional Competence» and• strive to maintain and improve the competence of other investment

professionals.


Standards of Professional Conduct CFA

• I. PROFESSIONALISM• II. INTEGRITY OF CAPITAL MARKETS• III. DUTIES TO CLIENTS• IV. DUTIES TO EMPLOYERS• V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS• VI. CONFLICTS OF INTEREST• VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA

CANDIDATE


Standards of Professional Conduct CFAI. PROFESSIONALISM

• A. Knowledge of the Law• Members and Candidates must understand and comply with all

applicable laws, rules, and regulations (including the CFA InstituteCode of Ethics and Standards of Professional Conduct) of anygovernment, regulatory organization, licensing agency, or professionalassociation governing their professional activities.

• In the event of conflict, Members and Candidates must comply withthe more strict law, rule, or regulation. Members and Candidatesmust not knowingly participate or assist in and must dissociate fromany violation of such laws, rules, or regulations.



• B. Independence and Objectivity• Members and Candidates must use reasonable care and judgment to

achieve and maintain independence and objectivity in theirprofessional activities.

• Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence andobjectivity.



• C. Misrepresentation

• Members and Candidates must not knowingly make anymisrepresentations relating to Investment Analysis Recommendations, Actions, or other Professional Activities.



• D. Misconduct

• Members and Candidates must not engage in any Professional Conduct involving Dishonesty, Fraud, or Deceit or Commit any actthat reflects adversely on their professional reputation, integrity, orcompetence.




CANDIDATE


Standards of Professional Conduct CFAII. INTEGRITY OF CAPITAL MARKETS

• A. Material Nonpublic Information

• Members and Candidates who possess material «NonpublicInformation» that could affect the value of an investment must not act or cause others to act on the information.


Standards of Professional Conduct CFAII. INTEGRITY OF CAPITAL MARKETS

• B. Market Manipulation

• Members and Candidates must not engage in practices that distortprices or artificially inflate trading volume with the intent to misleadmarket participants.




CANDIDATE


Standards of Professional Conduct CFAIII. DUTIES TO CLIENTS

• A. Loyalty, Prudence, and Care• Members and Candidates have a duty of loyalty to their clients and

must act with reasonable care and exercise prudent judgment. • Members and Candidates must act for the benefit of their clients and

place their clients’ interests before their employer’s or their owninterests.



• A. Loyalty, Prudence, and Care

• Members and Candidates have a duty of loyalty to their clients andmust act with reasonable care and exercise prudent judgment.

• Members and Candidates must act for the benefit of their clients andplace their clients’ interests before their employer’s or their owninterests.



• B. Fair Dealing

• Members and Candidates must deal fairly and objectively with allclients when providing

• investment analysis, making investment recommendations,• taking investment action, or engaging in other professional

activities.



• C. Suitability• 1. When Members and Candidates are in an advisory relationship with• a client, they must:• a. Make a reasonable inquiry into a client’s or prospective client’s• investment experience, risk and return objectives, and financial• constraints prior to making any investment recommendation• or taking investment action and must reassess and update this• information regularly.• b. Determine that an investment is suitable to the client’s financial• situation and consistent with the client’s written objectives, mandates, and constraints before

making an investment recommendation or taking investment action.• c. Judge the suitability of investments in the context of the client’s• total portfolio.



• D. Performance Presentation

• When communicating investment performance information, Members and Candidates must make reasonable efforts to ensurethat it is Fair, Accurate, and Complete.



• E. Preservation of Confidentiality• Members and Candidates must keep information about current,

former, and prospective clients confidential unless:• 1. The information concerns illegal activities on the part of the client

or• prospective client,• 2. Disclosure is required by law, or• 3. The client or prospective client permits disclosure of the

information.




CANDIDATE


Standards of Professional Conduct CFAIV. DUTIES TO EMPLOYERS

• A. Loyalty

• In matters related to their employment, Members and Candidatesmust act for the benefit of their employer and not deprive theiremployer of the advantage of their skills and abilities, divulgeconfidential information, or otherwise cause harm to their employer.



• B. Additional Compensation Arrangements

• Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or mightreasonably be expected to create a conflict of interest with theiremployer’s interest unless they obtain written consent from allparties involved.



• C. Responsibilities of Supervisors

• Members and Candidates must make reasonable efforts to ensurethat anyone subject to their supervision or authority complies withapplicable laws, rules, regulations, and the Code and Standards.




CANDIDATE


Standards of Professional Conduct CFAV. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

• A. Diligence and Reasonable Basis• Members and Candidates must:• 1. Exercise diligence, independence, and thoroughness in analyzing• investments, making investment recommendations, and taking• investment actions.• 2. Have a reasonable and adequate basis, supported by appropriate• research and investigation, for any investment analysis,

recommendation, or action.



• B. Communication with Clients and Prospective Clients• Members and Candidates must:• 1. Disclose to clients and prospective clients the basic format and general

principles of the investment processes they use to analyze investments, selectsecurities, and construct portfolios and must promptly disclose any changes thatmight materially affect those processes.

• 2. Disclose to clients and prospective clients significant limitations and risksassociated with the investment process.

• 3. Use reasonable judgment in identifying which factors are important to theirinvestment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.

• 4. Distinguish between fact and opinion in the presentation of investmentanalysis and recommendations.



• C. Record Retention

• Members and Candidates must develop and maintain appropriaterecords to support their investment analyses, recommendations, actions, and other investment-related communications with clientsand prospective clients.




CANDIDATE


Standards of Professional Conduct CFAVI. CONFLICTS OF INTEREST

• A. Disclosure of Conflicts

• Members and Candidates must make full and fair disclosure of allmatters that could reasonably be expected to impair theirindependence and objectivity or interfere with respective duties totheir clients, prospective clients, and employer.

• Members and Candidates must ensure that such disclosures areprominent, are delivered in plain language, and communicate therelevant information effectively.



• B. Priority of Transactions

• Investment transactions for clients and employers must havepriority over investment transactions in which a Member orCandidate is the beneficial owner.



• C. Referral Fees

• Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for therecommendation of products or services.




CANDIDATE


Standards of Professional Conduct CFAVII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE

• A. Conduct as Participants in CFA Institute Programs• Members and Candidates must not engage in any conduct that

compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

• B. Reference to CFA Institute, the CFA Designation, and the CFA Program• When referring to CFA Institute, CFA Institute membership, the

CFAdesignation, or candidacy in the CFA Program, Members andCandidates must not misrepresent or exaggerate the meaning orimplications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program


Documents

Ethical Issues in Finance BAF 332 - Bülent Şenver · Core Values of Companies •Accenture 1. Stewardship 2. The Best People 3. Client Value Creation 4. One Global Network 5. Respect